US housing agency raises mortgage deposits for some

By Reuters Staff
January 20, 2010

(Recasts with FHA announcement)

By Corbett B. Daly

WASHINGTON, Jan 19 (Reuters) – The U.S. Federal Housing Administration said on Tuesday it will raise the minimum down payment required to secure an FHA-backed mortgage for less creditworthy borrowers as part of a series of steps to shore up the agency’s finances.

The FHA said borrowers with credit rating scores below 580 would be required to make a down payment of at least 10 percent, while the rate for higher-ranked borrowers would stay at 3.5 percent.

It also said it would increase the up-front mortgage insurance premium, which is paid by the borrower when the loan is made, to 2.25 percent from 1.75 percent.

The moves will raise the cost of mortgages at a time the housing sector is trying to find its feet, but the agency said it was a prudent step to ensure its financial health and carry on its mission of supporting home ownership.

“Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important,” FHA Commissioner David Stevens said in a statement.

The FHA said in November that its capital reserves had dwindled to just 0.53 percent of the value of the thousands of home mortgages it insures, well below the 2 percent required by law and down sharply from 3 percent in 2008.

To help rebuild reserves, the agency said it would seek congressional approval to allow it to raise annual mortgage insurance premiums — which are paid out by the borrower over the life of the loan — above the 0.55 percent maximum.

If approved, this would allow it to shift some of the increase in the up-front premium to the annual premium.

“This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual (premium) is paid over the life of the loan instead of at the time of closing,” it said.

It did not specify a new level for the annual premium.

The FHA also said it was cutting the amount of aid sellers could provide buyers to 3 percent of the purchase price from 6 percent, a move it said could help lessen incentives to inflate appraised home values.

The changes come at a time when FHA-backed credit has never been more important to housing. Mortgage credit for many Americans dried up when the housing boom went bust in 2007, touching off the biggest financial crisis in 70 years.

The agency saw a fall in volume during the boom as Wall Street investment banks offered lenders a lucrative market for their loans, but agency volume has soared since mid-2007 as lending standards tightened and easy access to capital dried up.

Applications for FHA-guaranteed mortgages exceeded an annual rate of 3 million in October, nearly triple the level in 2007. In 2006, when subprime and other Wall Street programs were at full speed, the annual rate for applications was less than 600,000. (Additional reporting by Tim Ahmann; Editing by Jan Dahinten) ((corbett.daly@thomsonreuters.com; +1-202-898-8395; Reuters Messaging: corbett.daly.thomsonreuters.com@reuters.net))

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